On Thursday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new data verification portal to be used for equity-based compensation plans that U.S. companies submit for approval by their shareholders. This is a welcome change to ISS policy; although call me a cynic, but I believe this new policy has more to do with the SEC Staff’s recent interpretive guidance and less to do with actually improving their product.
Criticism of ISS (and the other proxy advisors) is nothing new. Public companies have long complained about ISS’s conflicts of interest (ISS “grading” issuers’ corporate governance policies and then charging companies a subscription fee to learn how to improve their “grades”). Further, ISS constantly churns their corporate governance policies (presumably) to keep their services relevant. But, the biggest complaint from public companies occurs when ISS makes a recommendation based on erroneous data. In fact, in a study from the Center on Executive Compensation, 17% of respondents reported erroneous analysis of long-term incentive plans and 15% of respondents reported that proxy advisors analyzed company policies, plans or benefits based on provisions no longer in effect.
The criticism continues to build. As we blogged about recently, a member of the Republican House leadership, Rep. Patrick McHenry, has hinted at legislation to rein in proxy advisory firms. Further, the Staff’s recent Staff Legal Bulletin No. 20 (SLB 20) also starts to turn the heat up on the proxy advisory firms. SLB 20 addresses disclosure of conflicts of interest, the applicability of the proxy rules to proxy advisory firms, and, maybe most important, the duties of an investment adviser when retaining a proxy advisory firm. Specifically, SLB 20 makes it clear that it is an investment advisory firm’s duty to ensure that the proxy advisory firm has the ability to make voting recommendations based on materially accurate information. If an error is found, the adviser should investigate the error and determine whether the proxy advisory firm is taking reasonable steps to reduce similar errors in the future. Thus, continued errors from firms such as ISS could ultimately lead to the demise of the industry.
Regardless of whether ISS is reacting to criticism and trying to save their business model or maintaining their “commitment to transparency and accuracy” as ISS claims, the change is an improvement. Here are the details:
- Equity Plan Data Verification program begins for all proxy statements filed after September 8, 2014
- Program allows issuers to preview, and update if necessary, the data used by ISS in making its voting recommendation on new equity plans
- To be eligible for the program, issuers must file their definitive proxy materials at least thirty days in advance of their meeting date
- To participate, issuers must request that company contacts be sent equity plan data logins
- Issuers will have approximately two business days to verify the data generally beginning 12 business days following the filing of the definitive proxy materials
- When the data verification period opens, an issuer’s pre-registered contacts will be notified by ISS
- This new program is in addition to the ISS Governance QuickScore Data Verfication and the S&P 500 Draft Review processes
Rest assured though, if you elect not to participate in the new equity data verification program, ISS says you “will receive the same careful and meticulous attention to data collection accuracy that [you] have always received.” I think that is what we are all afraid of…